Stuart K. Hayashi
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| Me with the book (this is a copy from the library). |
Finance professor William N. Goetzmann -- son to the famous Pulitzer Prize-winning historian William H. Goetzmann -- has come out with a fascinating book titled Money Changes Everything: How Finance Made Civilization Possible (New Haven, CT: Yale University Press, 2016). It purports to be a comprehensive history of finance from the very time of its founding. Except for suffering from two large and regrettable shortcomings, it does a good job.
Best Definition of Finance I’ve Come Across
It begins by providing a definition for finance, better than any I heard in business school. According to Goetzmann, finance has three components. First is trade. Two parties agree to some exchange of values. The second component is time -- finance is all about the future. In the financial give-and-take, one party agrees to a specific action in the present whereas the other party agrees to a specific action in the future. When you receive a value in the present in exchange for promising to do something of value in the future, you are the debtor; the debt is settled once those commitments are met. The party that provided a value in the present and that is to receive another value in the future is the creditor. Also possible is that one party agrees to perform a specific action of value in the near future as the other party agrees to perform another specific action of value in the farther future. That finance is about promises to perform specific actions in the future is the reason for the third component: documentation. So that both parties can be held to the promises they made, the agreement must be written out for future reference, and the values exchanged are to be quantified so that there is precision in the measurement of values in case of future dispute among the parties.
Indeed, the words finance and finish come from the same root. It refers to paying off all of a debt at least, thereby finishing the debt. That is also how, in the European Middle Ages, the term of governmental fine arose -- the fine is what the government declares to be the debt you owe it.
Goetzmann’s explanation of the definition of finance also helped clarify a matter that had long nagged at me -- the distinction between economics and finance. People frequently get economics and finance mixed up. Both sciences involve money and the exchange of values and other resources in the service of satisfying marketplace demand. However, here are some differences.
First, in economics the emphasis is on the past and present. Economists look at what happened in the past and they tell you what is going on in the present. Economists are indeed frequently called upon to forecast future conditions, but forecasting is not essential to the profession -- that is, you can still practice economics even if you don’t make forecasts. Moreover, even when an economist does forecast future conditions, he or she is not necessarily planning for that future -- it is the parties planning for the future who pump the economist for predictions. By contrast, planning for the future is inherent to finance; if no promises for future actions are made, then it’s not finance.
Secondly, finance is a much more normative science than is economics. An economist can tell you that, under specific economic conditions, there will be specific results, but the economist doesn’t have to conclude that this is good or bad; the economist does not necessarily tell you what ought to be done. By contrast, finance is perforce normative: to be a practitioner in finance means that you either know which specific procedures a good financier ought to follow, or you are looking to discover what are the best specific procedures. Those procedures in finance are ultimately for the purpose of reallocating resources where they are in lower demand, transferring them to where they are in higher demand. Every financial instrument serves at least one of the following functions.
- Directly reallocating resources, taking them where they are in lower demand, and placing them where there is greater marketplace demand for them.
- Transmitting data to participants in the market about changes in supply or marketplace demand so that they can make better-informed decisions on how to maximize the satisfaction of marketplace demand.
Finally, finance -- usually more so than economics -- focuses on what a specific party ought to do. Economists look at multiple participants in a market -- the consumers and vendors -- and recognize that the conditions in the market are the accumulated sum of many individual choices. By contrast, when you think about finance, you are thinking specifically about how your own household or firm in particular ought to plan for the future and meet its commitments as you manage its resources.
If Finance Bores You, Perhaps This Re-Interpretation of It Might Help...
I know that many people find finance boring; with just one glance at numerical figures on a page, their eyes glaze over. Too many people dismiss finance as merely crunching numbers and pushing papers around. They find it tedious at best and incomprehensible at worst because they don’t recognize what the numerical figures represent. Finance is actually not fundamentally about money as such, but the values for which the money is traded.
A moneylender is not fundamentally using money to make more money, but is performing the service of providing you with values and resources in the present, at a time much sooner than they would otherwise be available to you; the interest you pay to the moneylender is the fee you pay to the lender for the service of availing these values to you more promptly than they otherwise would be availed. It is often said that time is money; when you pay interest on a loan, what you are purchasing is time. When you examine financial documents, it’s helpful to visualize what those figures represent: the resources being reallocated, made accessible, to entrepreneurs for the production of goods and services for your benefit. Visualize how those numerical figures make it possible for you to take the vacations you love. When you see it that way, finance becomes much less boring.
I am thankful to Goetzmann for helping clarify this for me. However, this is a book on history, so let’s get to that.
How the Written Word Began With Finance
Right from the first chapter, Goetzmann offers important observations that too many historians, economists, and financiers have overlooked for too long: finance was integral to the invention of written language itself, as the ancient Mesopotamians first invented writing for the purpose of documenting contractual agreements whereby at least one of the parties had to fulfill an obligation -- a debt -- at a future date. The first written characters were standardized pictograms -- a particular symbol would represent a single unit of grains. As the transactions grew more sophisticated, though, the pictograms ceased to be adequate; they were replaced by a much larger number of wedge-shaped symbols that came to be known as cuneiform. The fact that writing was first invented for the purposes of bookkeeping, accounting, contracting, and finance has been well-known among archaeologists for decades, but not even they have fully understood the ramifications this fact has had for our modern life, and hence they had not phrased this point as clearly as Goetzmann has. Today we read so many essays that amount to screeds about the evilness of commerce and finance. Yet it is to commerce and finance that we owe the very existence of writing, the original information technology. These ancient Mesopotamians likewise invented arithmetic for the purpose of adding precision to their production and trade of goods and of their settlements of debts.
Goetzmann even goes as far as arguing that because finance and contracts developed the abstraction skills of the ancient Greeks, it is the case that, however much the ancient Greek philosophers disdained financiers, it was the abstraction-building of the ancient Greek financiers that made ancient Greek philosophy possible.
Atlas Shrugged in Ancient Babylonia; Ancient Athens Was Where the First Antitrust Trial Took Place
I have read histories of ancient Greece and ancient Rome before, but this was the first book I remember reading that adequately explained how finance and usury were integral to their development. The book even elaborates on how the archaeologist Marc Van de Mieroop discovered that, as a consequence of King Rim-Sin imposing price controls -- specifically, caps on interest rates -- on the Mesopotamian city-state of Ur, the city-state's economy stagnated and never truly recovered. Atlas shrugged even in ancient Babylon! Moreover, Goetzmann goes over the testimonies of a trial of grain merchants in ancient Athens who were threatened with the death penalty upon being accused of forming a cartel to drive up grain prices -- history's earliest recorded antitrust trial. In these respects, I learned much.
This Book Acknowledges That Ayn Rand’s Contribution Is an Important Part of the History of Global Finance(!!!)
Goetzmann even has a section near the end titled "Seeds of Objectivism." In his history of finance -- that goes all the way back to ancient Mesopotamia and the invention of writing -- Goetzmann properly recognizes Ayn Rand's writings as essential to this history. Predictably, Goetzmann doesn't agree with Ayn Rand; he admits that she is too idealistic for a cynic such as himself. Political conservatives, so pessimistic about human nature, routinely find Ayn Rand too idealistic for their taste. And, also typical for a political conservative, Goetzmann tritely says Ayn Rand is in the same category as Karl Marx on account of being "utopian."
Despite Goetzmann's silliness there, I have to give him credit for being honest enough to admit that rejecting Ayn Rand's philosophy is an act of cynicism. On some level, the left-wing writers who trash Ayn Rand are aware of this, but they prefer to put on the pretense that Rand’s defense of peaceable self-interest actually makes her too cynical for them -- they want to posture as the truuuuuuuuue idealists. At least here, with Goetzmann, we find an author fessing up to the actual reason so many authors are uncomfortable with Ayn Rand's ethical theories.
Book Becomes Less Interesting the Closer It Gets to Modern Times, Thanks to the Lip Service to Keynesianism
When it comes to giving a full history of finance, the book has two major weaknesses. First, the author blindly accepts the Keynesian (mis)interpretation of the events of the twentieth century. Goetzmann properly points out how medieval Chinese central banks failed to sustain the command economy simply by printing money and devaluing each monetary unit, and yet this same Goetzmann presumes that a sprawling central government can sustain itself forever by borrowing money to fund its myriad programs. Anyone who presumes that the U.S. federal government’s present method of financing itself through debt can be sustained in the long term has no business accusing Ayn Rand or anyone else of being impractical.
You Can’t Have a Complete History of Finance If You Avoid Addressing Antisemitism
The other major weakness is much larger: Goetzmann glosses over the topic of antisemitsm altogether. For what is supposed to be a grand overview of the history of finance throughout the world, since pre-Biblical times, this is conspicuous. You actually cannot have a well-integrated history of finance if you overlook the involvement of antisemitism.
Many people are familiar with the stereotype that Jews are savvy about finance in general and moneylending in particular, but very few people ask themselves how this stereotype came to be -- there wasn’t even anything voluntary on the part of Jews when it came to this association. This came about during the high Middle Ages. After centuries of economic stagnation throughout the early Middle Ages, nobles and royals came to admit to themselves that, if they wanted to build up their palaces and armies, they had to allow some liberalization when it came to finance. They had an enormous dilemma: the church still proclaimed it a terrible sin for Christians to loan money to other Christians at a profit; that was usury. One of the first loopholes to this rule that nobles exploited was their decision to have it legal for Jews to loan money to Christians at a profit. They considered this sinful as well, but they figured that Jews were going to go to hell anyway for not being Christian, so what additional harm could there be?
At the same time, Jews wanted to enter many other professions, but this was forbidden to them by law. Jobs were controlled by craft guilds -- government-enforced cartels. If you were in medieval Europe and wanted to become a blacksmith, you had to join the blacksmith guild . . . and Jews were barred from them. For this reason, from the high Middle Ages to the Renaissance, Jews loaned money at a profit to Christians because that was the only work available to them -- and, for centuries thereafter, people throughout the Western world ignorantly presumed that Jews were moneylenders solely because they had some innate preference for that profession over all others!
Incidentally, a similar phenomenon happened with Jews in motion picture productions and in publishing. Anti-Semites carp about Jews being prominent in Hollywood and even in business of publishing comic books, but those anti-Semites don’t bother to ask themselves why Jews ever became prominent in these industries. It was that in the early 1900s in the USA, Eastern European Jews still faced a lot of discrimination when it came to looking for work. Hence, to earn any money at all, they had to resort to starting their own businesses. In the early 1900s, the industries of comic book publishing and motion picture production were just emerging. Jews that faced heavy discrimination noticed these nascent enterprises and thus jumped at those opportunities, starting motion picture production studios and comic book publishing houses that eventually became the leaders in the respective industries.
The association of Jews with finance was even a major contributing factor to the ascension of the Nazi movement and the outbreak of the second World War. Adolf Hitler first joined the Nazi Party, back when it was still called the German Workers Party, on account of this association. In September 1919, Hitler's employer, Karl Mayr, tasked him with attending a lecture by German Workers Party member Gottfried Feder; Hitler was to report back to Mayr about this. The topic of Feder's speech was the evilness of Jews for lending money to Aryans and then charging them interest for those loans. Intrigued, Hitler chatted with party founder Anton Drexler, who handed him a pamphlet, titled My Political Awakening, arguing these same points about how there needed to be political action to curb the activities of Jewish bankers. Hitler joined the German Workers Party, got its name changed to the National Socialist German Workers Party and, with Drexler, co-authored a new platform for the party that made it a special point to demand that the State restrict what Jewish financiers could do. The widespread hatred for Jewish financiers was a great part of the Nazi Party’s appeal throughout the late 1920s and early 1930s.
The antisemites’ association of Jews with finance was so instrumental among the factors contributing to the causes of World War II that no history of the war would be complete without it. Likewise, for a purported complete history of world finance -- going all the way from pre-Biblical ages to the present -- to ignore this topic, makes for the most glaring omission.
And yet, when Goetzmann goes over finance during the Middle Ages, he only talks about the Knights Templar loaning money. The Knights Templar were indeed interesting -- especially with respect to how King Philip cited Biblical doctrine against homosexuality as he leveled trumped-up accusations against the Knights Templar in his effort to seize their wealth -- but replacing the history of Jewish financiers with the history of the Knights Templar is hardly excusable in what is supposed to be an exhaustive history of finance.
Conclusion
Aside from those two major errors, the history of finance in ancient Mesopotamia, Greece, and Rome is engrossing. As is typical of books that claim to give a comprehensive economic histories of the world, the book is most objective in discussing early history but increasingly adheres to the conventional statist interpretation as the text gets closer to the twentieth century.
